cash flow management practices: an empirical …

Risk governance & control: financial markets & institutions / Volume 4, Issue 2, 2014, Continued - 1

87

CASH FLOW MANAGEMENT PRACTICES: AN EMPIRICAL STUDY OF SMALL BUSINESSES OPERATING IN THE SOUTH

AFRICAN RETAIL SECTOR

Augustine Oghenetejiri Aren*, Athenia Bongani Sibindi**

Abstract

The small, micro and medium business enterprises (SMMEs) sector is universally acclaimed for fostering economic growth in many economies. The health of this sector is largely premised on the observance of prudent financial management tenets, mainly cash flow management. In this study we interrogate the influence of cash flow management practices on the survival or growth of the SMMEs by conducting a survey amongst the SMMES operating in the retail sector of Pretoria in South Africa. We find evidence that cash flow management is extremely important to the survival of a business, particularly small businesses, and poor cash flow management can also lead to small business failure. We also proffer policy advice as to the remedial actions needed to safeguard this sector. Keywords: Cash Flow, Small Business, Economy, Financial Management, South Africa * Postgraduate Student- c/o University of South Africa, Department of Finance ,Risk Management and Banking, P.O Box 392, UNISA, Pretoria 0003. Email: [email protected] Tel: +27(0) 12 -429 3757 ** Lecturer-University of South Africa, Department of Finance ,Risk Management and Banking, P.O Box 392, UNISA, Pretoria 0003. Email: [email protected] Tel: +27(0) 12 -429 3757 Fax: +27 (0) 86-569-8848

1. Introduction

The significant and dynamic contributions of small

businesses to the economy of countries cannot be

overestimated. Small businesses are, globally,

recognized as the backbone of country economies;

instruments for fostering economic growth,

entrepreneurship, and resourcefulness. It is estimated

that 91% of formal business entities in South Africa

are small, micro, and medium enterprises (SMMEs)

and that these SMMEs contribute between 52 to 57%

to the GDP and provide about 61% to employment

(Abor and Quartey, 2010). Despite the notable

contributions of small businesses as drivers of

economic growth in terms of employment creation,

and tremendous GDP contributions, SMMEs globally

still face high failure rates with South Africa having

one of the highest SMME failure rates in the world.

The astonishing and unarguable contribution of

SMMEs to the South African economy in terms of job

creation, poverty alleviation and eradication, thus

makes the issue of the growth and survival of small

businesses a particularly exigent matter for academic

discussion and study.

“Cash is King” – a widely quoted adage in

finance, fundamentally accentuates the importance of

cash and good cash flows to any business or

organisation. Under the premise that efficient cash

flow management processes results in the success of

business, the present study sets out to examine cash

flow management of SMMEs in the South African

retail sector, and recommend ways in which these

SMMEs can ensure efficient cash management

processes.

A large body of academic literature has been

devoted to the concept of cash flow and cash flow

management. These include the works of Soenen

(1973), Berryman (1983), Drever and Hartcher

(2003), Mackevičius and Senkus (2006), Cui, Hastak,

and Halpin (2010), Morin and Maux (2011) amongst

others. They emphasise and reiterate the importance

of good and effective cash flows and cash

management for organisations/businesses. Important

and relevant as this may be, as proper cash flow

management to the growth and survival of a business

cannot be over-emphasised, limited research has been

conducted to probe the challenges, and difficulties

faced by small, micro, and medium enterprises

(SMMEs) in sustaining good cash flows and efficient

mailto:[email protected]

mailto:[email protected]


88

cash management processes. Research into the small

business sector in South Africa has been insufficient

and inadequate, and this has hampered the

development of the sector (Mbonyane and Ladzani,

2011).

It is estimated that the failure rate of SMMEs in

South Africa is between 70% and 80% (Fatoki, 2011).

In consonance with this statement, SME South Africa

(2012) identified poor inventory and cash flow

management among the top ten reasons reasons why

small businesses fail. Several reasons are cited for this

alarmingly high failure rates among small businesses

in South Africa, inter alia, poor cash flow

management. The rationale for undertaking this study

will thus be to examine the reasons for such

outrageous and startling failure rates among SMMEs,

primarily giving cognisance to the current cash

management processes and pressing cash

management needs of retail SMMEs in South Africa.

This research effort seeks to unravel the challenges of

cash flow management faced by SMMEs in the South

African retail sector and recommend ways to improve

and ensure healthy cash flows for these businesses.

The rest of the paper is organised as follows; a

literature review is conducted in the next section, the

research methodology is outlined in Section 3, the

research findings are discussed in Section 4 and

Section 5 concludes.

2. Literature Review 2.1 SMMEs: Definitions and categories

From the review of past research and academic books,

it is noted that there is no single, universally accepted

definition of the term ‘SMEs’. Various research

articles and books conducted on the topic of SMMEs,

as well as various countries and economic

legislations, have differing definitions of SMEs. In

reviewing past literature, several definitions of SMEs

were provided, as these definitions vary from one

country to the other, and what constitutes an SME has

been argued differently in different research articles

and books written by various research minds.

Other research articles use measures such as the

number of employees; annual sales or receivables; net

worth, and the relative size of the business within its

sector. Given the disparate criteria for defining

SMMEs, it is evident that the definition of small

businesses differs from country to country, and

industry to industry. Businesses considered as SMEs

are those with less than 200 employees in the United

Kingdom, less than 500 employees in the United

States of America, and a maximum of 100 employees

for the Organization for Economic Co-operation and

Development (OECD) (Anderson, 2011). The

Dalberg report on Support to SMEs in Developing

Countries (2011) outlines the European Union

definition of SMMEs as follows: “The category of

micro, small and medium-sized enterprises is made up

of enterprises which employ fewer than 250 persons

and which have an annual turnover not exceeding 50

million euro, and/or an annual balance sheet total not

exceeding 43 million euro.”

The National Small Business Act (South Africa)

defines a “small business” as a separate and distinct

business entity, including cooperative enterprises and

non-governmental organizations, managed by one

owner or more which, including its branches or

subsidiaries, if any, is predominantly carried on in any

sector or sub-sector of the economy and which can be

classified as a micro-, a very small, a small, or a

medium enterprise (SMME). Brand, Du Preez, and

Schutte (2007) elucidate that the term ‘SMME’ is

mostly South African-related and includes ‘micro’

enterprises, as opposed to the more general accepted

term ‘SME’ ”.

2.2 SMMEs in the South African Retail sector

The retail sector forms a critical element of a

community’s economic and social welfare and

provides people with choices of products and services

(Ligthelm, 2008). Small business or Microenterprise

activity in retail trade is considered the most prevalent

entrepreneurial activity in the informal sector of

Africa. In a census of microenterprises conducted, it

was found that about 70% of South African micro-

businesses are concentrated in the retail sector

(Ligthelm, 2006). SMMEs operating in the wholesale

and retail trade, repair of motor vehicles, motor

Cycles, personal and household goods, and hotels and

restaurants, industry, make up 22.9% of the formal

sector, and 51.7% of the informal sector of the South

African economy (The Department of Trade and

Industry, 2008).

The National Small Business Act of 1996

classifies small businesses into four categories: micro,

which includes survivalist enterprises; very small;

small; and medium (Luiz, 2011). Given the numerous,

and sometimes conflicting definitions of SMEs in

various research papers and books, and thus in order

to simplify the research process, this research effort

employs the definition of SMMEs operating in the

retail sector, as set forth by the National Small

Business Amendment Bill (South Africa) of 2003, as

“enterprises which employ fewer than 200 persons,

and which have an annual total turnover not

exceeding 39 million rand, and/or an annual total

gross asset value (fixed property excluded) not

exceeding 6 million rand”.

2.3 The important, but precarious nature of SMMEs

Globally, the momentous importance and contribution

of SMMEs to various national economies cannot be

overestimated. SMMEs play a significant role in the

contribution to the Gross Domestic Product (GDP) of


89

the economy as well as in the creation of employment

opportunities for the employable workforce. Bruwer

(2012) asserts that in South Africa, there are an

estimated number of 3,830,511 small medium and

micro enterprises (SMMEs) currently in operation. He

further postulates that these business entities play a

pivotal role in the creation of jobs, the alleviation of

poverty and the overall enhancing of the economy.

According to Indexmundi (2012), the estimated GDP

of South Africa stood at a mammoth $491.4 billion

(R3.149 trillion) in 2004. Of this total GDP, they

believe that SMMEs contributed 35% thereof, which

translates to $171.9 billion (R1.102 trillion) (De

Jongh, Van der Merwe et al, 2012).

To further emphasise the notable contribution of

SMMEs to the South African economy, Thwala and

Phaladi (2009) in their research study on the problems

facing small contractors in the North West province

of South Africa, report, estimate that in 1995 the

overall contribution to the total GDP was 20.8% for

small enterprises, 11.9% for medium enterprises, and

67.3% for large enterprises. As regards contribution to

formal employment it was estimated at 29.5% for

small enterprises, 15.3% for medium enterprises, and

55.2% for large enterprises. This statement is

corroborated by a more recent study conducted by

Fatoki (2012) in the area of new SMMEs and their

financial management practices in South Africa,

which points to the increasing contribution of SMMEs

to the South African economy. According to the same

study micro, very small and small enterprises

contribute between 27-34% of the Gross Domestic

Product and 72% of all jobs in South Africa.

Despite the noted contributions of SMEs to the

world, and local economy in terms of increase in

GDP, poverty alleviation, and job creation, SMEs

worldwide, have a precarious nature, and are highly

prone to failure. Past Research conducted estimate

that 40% of new business ventures fail in their first

year, 60% in their second year, and 90% in their first

10 years of existence (Cant, 2012). In South Africa,

the number of SME failures in year 5 varies between

50 and 95% and about 75% of new SMEs do not

become established firms. This makes the failure rate

of SMMEs in South Africa one of the highest in the

world (Neneh, 2012)

2.4 Reasons why small businesses fail?

Van Scheers (2011) avers that a number of challenges

have been identified as proffering to the failure of

SMEs, not only in South Africa, but also worldwide.

A number of research articles have cited several

reasons why small businesses fail. Franco and Haase

(2009) in reviewing past literature for their study on

Failure factors in small and medium-sized enterprises,

identified a lack of qualifications and experience

possessed by SME founders or managers, as severe

constraints on SME’s development. Van Scheers

(2011) reaches a conclusion in her research study that

a positive correlation exists between marketing skills

challenges and business failure in South Africa. Other

reasons adduced for SMMEs failure include; Lack of

Business management training and skills (Ngwenya,

2012), poor bookkeeping, inexperience in the field of

business and the lack of technical knowledge, poor

managerial skills, lack of planning, and lack of market

research (Okpara, 2011), the lack of institutional

support, along with inadequate legislation and

excessive regulations (Franco and Haase, 2009), to

name but a few. However, in reviewing past and

current academic literature on the causes of SMEs

failure, one recurring factor which is continuously

highlighted as possibly the most important reason

why small businesses fail, is that of poor cash flow

management. Hatten (2012) in discussing managing

cash flow as an important principle of small business

management asserts that each business day

approximately a dozen U.S small businesses declare

bankruptcy. The majority of these business failures

are caused by poor cash-flow management.

2.5 Poor cash flow management and SMMEs failure

Most of the successful small businesses ensure that

they maintain a sound cash flow position for the

business. Good cash flow management is essential

because most of the SMEs that have failed, failed due

to poor cash flow management (April, 2005). It is

generally acknowledged as the single most pressing

concern of most small and medium-sized enterprises

(SMEs). These premises accentuate the cardinal

influence that proper and effective cash flow

management has on the failure or success of a

business, particularly SMMEs. Drever and Hartcher

(2003) in their research paper exploring the issues

relating to cash flow management practices on small

businesses in a regional area of Australia, postulate

the inevitable link between small business failure and

poor or careless financial management. All too often,

poor cash management systems have led small

business managers to liquidate or reorganize under

Chapter 7 or 11 of the Bankruptcy Code, and not just

SMMEs, but even large corporations cannot afford to

overlook the preeminent value of effective cash

management (Harvard Business School, 1998).

2.6 Techniques and methods for managing and/or improving a business’ cash flow

Given the indubitable effect that poor cash flow

management can have on businesses, particularly

SMMEs, it is imperative that small businesses know

how to- , and, manage their cash flows effectively.

Different articles and books recognize several

techniques and tools for managing cash –


90

2.6.1 Receivables, Payables, and Inventory management (Cash flow cycle)

Zimmerer et al. (2008) in writing about managing

cash flow in Small businesses, postulate that the first

step in effectively managing cash is to understand the

businesses’ cash flow cycle- which is the time lag

between paying expenses to creditors and receiving

payments from customers (debtors). They further

assert that for small businesses to lower the possibility

of a cash crisis, focus need to be paid on the three

primary causes of cash flow problems, namely –

Accounts receivable, Accounts payable, and

Inventory, which they term “The Big Three of Cash

Management”. This assertion is supported by Cui,

Hastak, and Halpin (2010) who also postulate that

effective cash flow management involves forecasting,

planning, monitoring and controlling of cash receipts

and payments. Rodriguez (2011) avers that many of

the key elements of a sound cash-management system

deal with accounts receivable. Since every dollar of

accounts receivable equals a dollar of cash invested

on the balance sheet, it stands to reason that the

quicker those receivables are collected, the more cash

is available for additional investments” These

findings are supported by Brigham and Daves (2007)

who observe that the shorter the cash conversion

cycle, the lower the required net working capital, and

the higher the resulting free cash flow. An intelligent

analysis of customer payment histories and

collections processes can significantly improve a

company’s cash position (Harvard Business School,

1998). It is recommended that businesses find ways to

speed up their receivables, while extending their

accounts payables period, without destroying their

credit ratings. This is the essential of effective

working capital management, resulting in higher free

cash flows (Brigham and Daves, 2007).

2.6.2 Maintaining an Optimal cash balance

Cash flow problems can force a profitable firm into

bankruptcy because the firm is unable to pay its bills.

Failure to correctly assess timing and control of cash

flows is one of the primary causes of small business

bankruptcy (Cheatham, Dunn, and Cheatham, 1989)

Cash management is a vital task because cash is the

most important, yet the least productive asset that a

small business owns (Zimmerer et al., 2008). All

businesses require cash to finance their daily

transactions. In addition to the transaction motive,

businesses need to hold additional cash for

unexpected requirements, or for precautionary

purposes. The opportunity cost of holding excess

cash, however, could be high, especially under high

interest rates. A target cash balance that involves a

trade-off analysis of covering cash deficiency and

avoiding excessive cash balance, thus needs to be

established (Cui, et al; 2010). A cash flow forecast, or

budget, is a recommended cash management tool,

which can help small businesses predict their

business’ cash inflows and outflows over a certain

period, and also identify potential cash flow gaps-

periods when cash outflows exceed cash inflows

when combined with the business’ cash reserves.

Using cash budgets, aging schedules, and float to

control the inflow and outflow of cash is paramount

for effective cash management (Hatten, 2012). Thus,

the cash flow forecast, or budget, as a tool, can be

used by small businesses to ensure that it is not

overwhelmed by unexpected fluctuations in cash

flows.

2.6.3 Building and promoting a cash culture

Van Scheers (2010), in her research study

determining the challenges faced by small family

groceries shops in South Africa, identified financial

problems as a major challenge faced by small grocery

shops. She posits- that the granting of consumer credit

also presents significant challenges for small

businesses. No less than 41.8 % ‘agree’ or ‘strongly

agree’ that, bad debts pose a serious problem to their

businesses. Cash flow is thus, a fundamental

determinant of the survival of small businesses

especially; not accounting profit or loss from credit

sales; but cash flow. Building a “cash culture”, is

thus, one such cash management practice that will

ensure that businesses achieve sustainable, long-term

improvements in cash management (Koon and Meng,

2012). SMEs, thus need to limit the amount of trade

credit granted to customers, especially those with

poor credit records, and insist on cash payments for a

majority of its’ transactions. This ensures the liquidity

of small businesses and limits the costs of bad debts

incurred.

3. Methodology 3.1 Research design

A qualitative research study was conducted. The

specific type of qualitative research design used was a

survey research study. Survey research involves

acquiring information about one or more groups of

people by asking them questions. It can be about their

characteristics, opinions, attitudes or experiences.

The population for this study consisted of

registered retail SMMEs located within the Pretoria

Central and Pretoria East area (specifically Sunnyside,

Pretoria CBD, Arcadia, Atterbury, Hatfield, Menlyn,

and Brooklyn) of the city of Tshwane in the Gauteng

province of South Africa. One of the primary

attributes of qualitative research is the small number

of participants in the study. The data for this study

was collected from 31 SMMEs owners, managers,

accountants and sales clerk responsible for the cash

management process of their respective businesses


91

(n=31). The research study primarily made use of the

purposive sampling and quota sampling methods. In

qualitative research, the sample is intentionally

selected according to the needs of the study,

commonly referred to as ‘purposive sampling’ or

‘purposeful selection’. Participants were therefore,

chosen from the different categories comprising

SMMEs, namely- small-, medium-, and micro-,

enterprises, until the target number was met.

3.1 Data collection

The data for this study was collected by means of

interviews and questionnaire. Based on the research

objective and research questions, an interview

schedule and questionnaire was developed to collect

data from the research study sample. Interviews were

conducted with 25 selected respondents, while six of

the selected respondents refused to be involved in the

interview process and opted rather to fill out the

questionnaire. In the interview process, a series of

semi-structured and open- ended questions were

asked. During the interview process, the interviewer

made notes, and responses were recorded with the aid

of a tape recorder, with the explicit knowledge and

permission of the respondents, to ensure that their

responses could be replayed and transcribed

accurately ensuring that main points discussed were

not forgotten or misinterpreted. Clarifying questions

were asked on some of the responses provided, as

well as the explanation of certain terms and concepts

to respondents who had difficulties comprehending

them. Probing questions not included in the interview

schedule were also asked to elicit from respondents, a

richer data pertinent to answering the research

objectives and secondary questions

The semi-structured questionnaire developed,

containing close and open-ended questions was self-

administered to different respondents across the

disparate retail SMMEs. In accordance with the

objective of the research study, the questionnaire was

sub-divided into 4 sections. The first section solicited

information about respondents’ profile. This was done

to determine demographic / background information

about the respondents. Section B contained questions

pertaining to the SMMEs being surveyed such as the

location of the business, nature of business, number of

employees appointed, etc. Section C, and Section D

elicited responses concerning the cash management

process of the respondents’ SMME and in the opinion

of the respondent, based on their knowledge and

experience, the relationship between cash

management and business failure, respectively.

3.2 Responses to Questions

All questionnaires handed out to respondents were

answered and returned. Respondents did not rush

through the questions due to time constraints.

Respondents who received questionnaires had ample

time (1 – 2 weeks) to think through and provide

answers to the questions. Further discussions were

held with some respondents to clarify their answers

and provide additional information on some of the

questions not properly answered or to which the

answers provided were not properly understood. The

data collection process took place over a period of

three weeks.

3.3 Data analysis

Data analysis for this study was done by means of

content analysis. Taylor-Powell and Renner (2003)

define content analysis as a basic approach for

analysing and interpreting qualitative and narrative

data. The content analysis of the qualitative data was

done by the researcher supported with the aid of the

ATLAS.ti 6.0 CAQDAS (Computer-aided qualitative

data analysis software). Qualitative analysis software

allows researchers to do many things that are difficult

or impossible to do by hand (Remler and Van Ryzin,

2011). The data content analysis process was done as

suggested by Taylor-Powell and Renner (2003),

Zhang and Wildemuth (2009), Andres (2012), Friese

(2012), and Maxwell (2013).

The data to the research study, namely the

contents of the interviews conducted as recorded with

a tape recorder, and the responses to the

questionnaire, were prepared and analysed. The

recorded interview proceedings were transcribed and

coded using the ATLAS.ti data analysis software. The

questionnaire responses were carefully analysed and

coded by the researcher in line with the research

objectives and questions. During the analysis of the

transcripts and questionnaires, certain recurring

answers, and themes started to form, and these were

identified as they stood out amongst other data. These

recurring themes from the interview transcripts and

the questionnaires were taken note of, coded, and

categorized by the researcher with the aid of the

CAQDAS software. Certain themes and responses

remained consistent and key to the research study.

Connections were made between these key categories

and themes discovered in the coded data and at this

stage these key themes and categories identified that

answered the research study objectives and secondary

questions, as well as recommendations and

information pertinent to the research study were

interpreted and noted. This data analysis process is

consistent with that proffered by Maxwell (2013) who

articulates that the main categorizing strategy in

qualitative research is coding and that in doing

qualitative research, the goal of coding is not

primarily to count things, but to break down the data

and reorganize them into categories which facilitate

comparison between items in the same category and

thus aid in the development of theoretical concepts.

Finally, the findings of the analysis, and results

concerning the research study were presented using

descriptive statistical analysis, with the aid of


92

Microsoft Excel 2010, which was used in the

organisation and presentation of the data analysis

results and findings. The results and findings of the

data analysis process were presented in the form of

tables, charts, figures, graphs, as well as percentages.

This research effort employed the use of

methodological triangulation, which is the use of

more than one method for gathering research data

(Interviews and questionnaires used), and data

triangulation which involves using different sources

of information (SMME owners, managers,

accountants, and sales clerk surveyed) in order to

increase the validity of a study.

4. Research Findings and Discussion

The questionnaires were dispensed to-, and interviews

were sought with-, a total of 31 SMME owners,

managers, and accountants/financial officers who

took part in the research study. 25 interviews were

conducted, and 6 of the participants refused to take

part in the interview process and opted to rather fill

out the questionnaire instead.

4.2 Brief overview of the Research

The overall objective of this research study was to

determine ways and methods SMMEs in the retail

sector can improve their cash flow management

processes in order to ensure consistent, reliable and

healthy cash flows.

In reviewing past and relevant literature on the

subject of small businesses, both locally and

internationally, the high failure rate of small

businesses was noted, especially in South Africa.

Several factors responsible for such high failure rates

in SMMEs were promulgated. Poor cash flow

management inter alia was cited as a major reason

why small businesses in South Africa and all over the

world, failed (Berryman, 1983, Drever and Hartcher,

2003, Morin and Maux, 2011, Agyei-Mensah, 2012;

Cant and Wiid, 2013). This research effort thus

sought out to examine the cash management practices

of retail SMMEs concentrated in the Pretoria

Metropolis of the Gauteng province of South Africa,

as well as ascertain the factors that influenced their

cash flows. The findings of the research study are

subsequently presented.

4.3 Section A. (Demographic and Background information)

This aim of this section was to establish the job titles

of staff in charge of the cash management process of

the respective SMMEs, and as well as to ascertain the

ethnicity and educational background of the

respondents.

4.3.1. Job title

Of the 31 respondents, 32.26% were owners, 54.84%

managers, 3.23% accountants/financial managers and

9.67% sales clerks. (See Table 1 below)

Table1. Job titles of staff responsible for cash flow management

Size of enterprise Size of enterprise Size of enterprise Total (n) Percentage (%)

Title of personnel Micro enterprise Small enterprise Medium enterprise

Owner 5 5 0 10 32.26

Manager 3 10 4 17 54.84

Accountant/Financial

manager

0 0 1 1 3.23

Other (Sales clerks) 1 2 0 3 9.67

Total 9 17 5 31 100

4.3.2 Ethnicity

Of the 31 respondents, 41.94% were African, 38.71%

were Whites, 16.12% were Indians, and 3.23% were

Coloured. This is as depicted in Table 2 and Figure 1

below.

Table 2. Ethnicity distribution

Ethnicity Frequency (n) Percentage (%)

African 13 41.94

White 12 38.71

Asian 0 0.00

Indian 5 16.12

Coloured 1 3.23

Total 31 100


93

Figure1. Distribution of Ethnicity

4.3.3 Educational qualification

The findings from the research study with regards the

educational qualification of respondents is presented

in Fig. 2 below. 9.68% of respondents had studied up

to primary level or below, 25.81% had completed

their secondary education, 12.90% had

technical/vocational training, and 51.62% had tertiary

qualifications and above.

Figure 2. Educational qualification

4.4 Section B (Information about respondent SMMEs)

Section B solicited responses about the nature of the

respondents SMMEs. Questions asked included the

classification categories of the respondent SMME, the

nature of business the SMME was involved in [these

preceding questions were to ensure that SMMEs

surveyed, complied with the definition of retail

SMMEs as defined by the National Small Business

Amendment Bill (South Africa, 2003), the area the

business was located, and the number of years it had

been in existence.

4.4.1 Classification category of SMME

Of the 31 SMMEs surveyed, 9 (29.03%) were micro

enterprises, 17 (54.84%) were small enterprises, and

(5) 16.13% were medium enterprises (Refer to Fig.3

below).

Figure 3. SMME distribution

Majority of the respondent SMMEs were

reluctant to disclose their annual turnover, which is

one of the metrics used by the National Small

Business Amendment Bill (South Africa, 2003) in

defining small retail businesses. Therefore, the

respondent SMMEs were classified according to the

42%

39%

0% 16%

3%

Ethnicity African Whites Asian Indian Coloureds

0 2 4 6 8 10 12 14 16 18

Other

Secondary level

Tertairy level or above

Level of education

0

5

10

15

20

Micro enterprise Small enterprise Medium enterprise

Mediumenterprise


94

number of employees they employed. Retail SMMEs

employing less than 5 employees were classified as

“micro enterprises”, less than or equal to 50

employees (i.e. 5 ≤ 50), were classified as “small

enterprises”, and enterprises employing between 50

and 200 employees (i.e. 50 ≤ 200) were classified as

“medium-sized” (National Small Business

Amendment Bill, South Africa, 2003). This metric

was used in conjunction with the Companies and

Intellectual Property Registration Office (CIPRO)

website where the information provided by

respondents such as the category of the business,

number of years since existence, nature of business

conducted, was cross-checked against the CIPRO

registration database to ensure validity and reliability

of the data collected.

4.4.2 Location

The population for this study consisted of registered

retail SMMEs located in the city of Pretoria in the

Gauteng province of South Africa. The sample

comprised of 31 SMMEs who are operating from

Pretoria. Of the SMMEs who participated in the

research study, eight were from Brooklyn, three from

Menlyn, six from Hatfield, and four from Atterbury.

The remaining 10 SMMEs were surveyed from the

Pretoria central metropolis- two from Sunnyside, four

from Arcadia, and four from the Pretoria CBD area.

4.4.3 Nature of business SMMEs are engaged in

9.68% of businesses surveyed were retail pharmacies,

19.35% were restaurants, 6.45% were bookshops,

35.49% were retail clothing, handbags, and shoe wear

shops, and the remaining 29.03% comprised of shops

that retailed general household items, gifts and other

consumables such as- household furniture and arts,

kitchen utensils, leisure goods (wine, coffee, etc.),

gadgets (security and travel), apple products (iPads,

iPhones, iPods and apple accessories) baby toys,

perfumes, and a meat and vegetable shop which sold

convenience products like bread, milk, and included a

bakery and a butchery. This is outlined as in Fig. 4

below.

Figure 4. Types of retail SMMEs surveyed

4.4.4 The number of years respondent SMMEs have been in business

Past research conducted estimate that 40% of new

business ventures fail in their first year, 60% in their

second year, and 90% in their first 10 years of

existence (Cant, 2012). In South Africa, the number

of SME failures in year 5 varies between 50 and 95%

and about 75% of new SMEs do not become

established firms. This makes the failure rate of

SMMEs in South Africa one of the highest in the

world (Neneh, 2012). This question was aimed at

determining the number of years, the retail SMMEs

surveyed had been in existence.

22.58% of SMMEs had been open for 0 to 3

years, 16.13% had been open for 3 to 5 years, 12.90%

for 5 to 10 years, and an amazing 48.39% of retail

SMMEs surveyed had been in business for 10 years

upwards (Refer to Fig.5 below). Two retail SMMEs

surveyed- a retail shop in Arcadia selling men’s

clothing and shoes, has been open for 95 years, while

the second retail shop located in the Atterbury value

mart shopping mall, which specializes in retail travel

and corporate bags, has been open since 1887.

10%

19%

6% 36%

29%

Retail SMMEs surveyed

Pharmacies

Restaurants


95

Figure 5. Distribution of years among SMMEs

Of the 15 SMMEs that have been in existence

for 10 years - upwards, 66.67% of these are small

enterprises, 20% are medium enterprises, and the

remaining 13.33% are micro businesses. 4 retail

SMMEs report to being in business for 5 - 10 years.

Of these, 50% are medium enterprises, and the

remaining 50% are micro-, and small businesses,

making up 25% respectively. The remaining 12 retail

SMMEs report to have been in business for 5 years or

less. Micro enterprises make up 50% of this number,

and small enterprises make up the remaining 50%.

In the interview process, 2 retail SMMEs

disclosed that their business had failed previously.

The manager of a small restaurant located in

Brooklyn, indicated that a second branch of the

business was opened in a different location but it

failed within its 1st year. The second SMME, a

bookshop situated in Pretoria CBD (a micro

business), revealed that his business failed initially

within 6 months of it opening.

4.5 Section C (Cash management practices of SMMEs)

Table 3. Question of whether the SMME has formal cash management processes or not

Size of enterprise Size of enterprise Size of enterprise Total (n)

Response Micro Small Medium

Yes 4 16 5 25

No 5 1 0 6

Total 9 17 5 31

25 of the 31 SMMEs surveyed, responded to

having formal and in-depth cash management

processes/techniques, while 6 retail businesses had no

formal processes for managing their cash flow.

94.12% of small businesses, and 100% of medium-

sized retail businesses, had formal processes for

managing their cash flows, while only 44.44% of

micro retail businesses attested to having such

processes.

Of the 25 SMMEs that affirmed they had formal

cash management processes for managing their cash

flows, 11 SMMEs described their cash management

process as basic, 7 SMMEs described their cash

management process as “not basic but somewhat

limited”. Only 7 SMMEs attested to having

comprehensive cash management processes. The 7

SMMEs that revealed they employ comprehensive

cash management processes in managing their cash

flows, comprised of the 5 medium-sized businesses

surveyed in the study, and 2 small businesses; one

pharmaceutical retail store, and one restaurant. The

study revealed that no micro enterprise surveyed had

comprehensive cash management processes for

managing their cash flows.

The most used cash management techniques by

SMMEs was the cash float. 96.77% of retail SMMEs

used this technique. One medium firm however,

didn’t use this technique. The least most used cash

management technique was the accounts receivables.

This was corroborated by the same result when retail

SMMEs where asked if they offered goods on credit.

77.42% of retail SMMEs did not use accounts

receivables and did not offer goods on credit. 5 out of

the 7 retail SMMEs that did credit sales where

medium enterprises. The analysis of the

questionnaires and interviews revealed that micro-,

0

2

4

6

8

10

12

0 - 3 years 3 - 5 years 5 - 10 years 10 years -upwards

Micro enterprises

Small enterprises

Medium enterprises


96

and small businesses shy away from offering goods

on account or credit (Refer to Table 4 below).

Table 4. Common cash management techniques

YES NO NOT FAMILIAR Total (n) Percentage (%)

Techniques YES NO

Accounts receivable 7 24 0 31 22.58 77.42

Accounts payable 17 14 0 31 54.84 45.16

Cash Budgets 22 9 0 31 70.97 29.03

Cash float 30 1 0 31 96.77 3.23

Credit sales 7 24 0 31 22.58 77.42

Cash flow cycle 11 20 (20)* 31 35.48 64.52

Stock/Inventory management 29 2 0 31 93.55 6.45

Cash culture 27 4 0 31 87.10 12.90

Process for recording cash 29 2 0 31 93.55 6.45

Another technique not used by retail SMMEs

surveyed was the cash flow cycle. 64.52% of SMMEs

were not familiar with the cash management

technique. They had either not heard about it or did

not employ it in their business. In explaining what a

cash flow cycle was, and how it had to do with

accounts payables, receivables, and inventory

management, the term “working capital management”

was brought up. 87.10% of retail SMMEs surveyed

didn’t know what it was or what it meant. When

asked if they had cash reserves for their business

(working capital), only 10 of the 31 SMMEs disclosed

to having working capital that the business was run

with.

These findings are in consonant with those of

Agyei-Mensah (2012) who found that only 3% of

responding SMEs always have shortage of cash for

spending while 60% always or sometimes have a

surplus of cash. Nevertheless, only about 27% of

SMEs deposit cash surplus into bank accounts, while

up to 63% did not know how to use the temporary

cash surplus for profitable purposes. This finding

reveals that cash surplus rather than cash shortage is a

problem for these SMMEs.

4.5.1 POS and security systems

Of the 31 SMMEs surveyed, 64.52% had Point-of-

sale (POS) till systems they used in their business

transactions. Majority of small-, and medium retail

enterprises used POS till systems complete with touch

screens, bar code scanners, pin pad machines for

credit and debit card payments, cash registers, and

software programs such as Quickbooks, Micros,

Titan, Integrity, ProPharm for Pharmacies, and

Orderwise. These point-of-sale systems recorded

sales, kept debtor and creditor records, did stock

control; what stock was leftover, and what had been

sold; helped in dispensing medication for pharmacies,

helped in simplifying the ordering of stock, and

payroll system amongst other benefits. 4 out the 31

SMMEs had sensormatic security systems, which are

Electronic Article Surveillance (EAS) and Radio-

Frequency identification (RFID) technology systems

to prevent shoplifting. The remaining 35.48%

comprised of all the micro SMMEs surveyed and a

few small businesses. These retail businesses still

operated a manual cash management system ranging

from the use of manual invoice books, not accepting

debit and credit cards, to the basics of just receiving

cash payments, writing cash received in a notebook

and handing the cash over to the store owner at the

end of business day instead of banking in the

business’ account.

Despite the low percentage of retail SMMEs

surveyed that do not use computerised systems, when

asked whether or not POS systems if used by retail

SMMEs would increase the survival rate of small

businesses in the retail sector of South Africa, 93.55%

of the retail SMMEs responded in the affirmative. The

remaining 6.45% replied to the contrary. These

findings are in line with that of McChlery, Meechan,

and Godfrey (2004) who establish the use of

computerised accounting systems as prominent

catalyst in promoting efficient financial management

in SMMEs.


97

Figure 6. Training distribution

20 out of the 31 retail SMME respondents

attested to having received no formal training to equip

them for their role in cash management in the

business (Fig.6 above). When asked if education or

training could help small business owners run their

businesses and manage their cash flows more

effectively, 90.32% of respondents replied in the

affirmative. However, when asked between education

versus experience, which played a more important

role in small business success and survival, 67.74% of

respondents chose experience, 12.90% chose

education, and the remaining 19.36% responded that

both education and experience were equally important

for small business owners/managers (See Fig.7

below).

Figure 7. Education versus experience

4.6 Section D (Cash flow management and small business failure)

This section was to determine if respondents

considered proper cash management as an important

factor to the survival and success of a business,

especially small businesses.

Table 5. ‘Poor cash flow management can lead to small business failure’

Extent Frequency (n) Percentage (%)

Strongly agree 27 87.10

Agree 4 12.90

Total 31 100

In line with the above assertion, when asked if

their business had experienced any cash flow

problems since inception, 17 of the 31 retail SMMEs

surveyed replied to the affirmative, while the

remaining 14 SMMEs said they hadn’t experienced

any cash flow problems till date (See Fig.8. below).

These findings are in line with research done in the

field of small businesses and go a long way in

corroborating Okpara (2011) who adduces those

management problems, including accounting, finance,

personnel, and management issues, as a major cause

of business failure for small businesses. Most small

business managers claim that cash management is

their leading concern. Small business managers face

different cash management challenges than their

counterparts in larger companies. Compared to larger

firms, small businesses often have under-staffed and

under-trained accounting staffs, volatile cash flows

dependent on a single product line, limited access to

new capital, and a significant share of their net worth

tied up in working capital (Harvard Business School,

1998).

35%

65%

Training Yes No

Education and Experience

Education

Experience

6

4

21

More Important More Important


98

Figure 8. SMMEs and cash flow problems

A further inquiry into problems, difficulties,

and/or challenges experienced by retail SMME

owners/managers, revealed several macro- and micro-

environmental variables which negatively affected

retail SMMEs. It can be deduced from the analysis of

the data that cash flow problems were not the only

difficulties experienced by small retail businesses.

One recurrent problem majority of respondents

complained about was excessive rental. One retail

business owner situated in Pretoria CBD commented:

Another recurrent problem cited by majority of

respondent retail owners was the issue of theft. These

difficulties/challenges experienced by SMMEs

operating in the retail sector in the Gauteng province

of South Africa are summarised and as follows:

Excessive rental prices

Theft (Employee theft and shop-lifting)

Seasonal sales leading to inconsistent cash flows

Mismanagement of cash float and stock by

employees leading to damages and loss of stock

Over-ordering of stock, abysmal inventory

control, budgeting and working capital management

Bad debts from credit customers

Competition from larger enterprises

Inadequate location

Unfavourable government regulations i.e.

taxation, pricing structure

Labour issues i.e. staff issues, remuneration

issues

5. Conclusion

The aim of the present study was to examine the

influence of good cash flow management practices on

the survival and/or growth of the SMMEs operating in

the metropolis of Pretoria. The motivation behind the

study derived from previous studies published in the

subject area of financial management on SMMEs that

conjecture that small business failure can inevitably

be related to poor or careless financial management

(See for example Berryman, 1983 and Harvard

Business School, 1998). We find strong evidence

(87.10% of retail SMMEs surveyed strongly agreed)

that cash flow management is extremely important to

the survival of a business, particularly small

businesses, and poor cash flow management can lead

to small business failure. These findings thus adduce

to the fact that cash flow is the life blood of all

businesses and is the primary indicator of business

health. By improving their existing cash management

techniques such as cash budgets, cash floats,

inventory control, cash flow cycle, and incorporating

new and proven cash management techniques such as

working capital management, POS systems, using

cash reserves etc., small and medium retail businesses

can improve their cash flows and ensure their

business’ liquidity.

It is also important to note that cash flow

management is not the only factor that impacts on the

survival of small businesses, (Franco and Haase,

2009; Van Scheers, 2011; Ngwenya, 2012; Seeletse,

2012; Cant and Wiid, 2013). Several other factors

mentioned by respondents, that impact on small

business survival, include-location, proper training for

owners/managers, qualified staff, quality product

offering, proper knowledge of product and target

market, excellent customer relations and service,

discipline, perseverance, and hard work.

We also wish to proffer policy advice to the

newly created ministry dedicated to SMMEs in South

Africa. Firstly there is a need to create an enabling

environment to ensure the success of the SMES.

There is a dire need for the entrepreneurs, especially

the small ones to be trained in financial management,

and procurement practises amongst others. Secondly

there is a need to make available credit to the

SMMES at concessionary rates to help finance their

working capital requirements.

References: 1. Abor, J. & Quartey, P. 2010, "Issues in SME

development in Ghana and South Africa", International

Research Journal of Finance and Economics, vol. 39,

no. 6, pp. 215-228.

2. Anderson, W. 2011, "Internationalization opportunities

and challenges for small and medium-sized enterprises

from developing countries", Journal of African

Business, vol. 12, no. 2, pp. 198-217.

55%

45%

Experienced cash flow problems?

Yes

No


99

3. Berryman, J. 1983, "Small business failure and survey

of the literature", International Small Business Journal,

vol. 1, no. 4, pp. 47-59.

4. Brand, R., Du Preez, N. & Schutte, C. 2007, "A

business framework to network small South African

enterprises for sustainability", South African Journal of

Industrial Engineering, vol. 18, no. 2, pp. 187-201.

5. Brigham, E.F. and Daves, P. R. 2007. Intermediate

financial management. 8th ed. Mason, Ohio:

Thomson/South-Western.

6. Bruwer, J. 2012, "The entrepreneurial mindset profile of

South African small medium and micro enterprises

(SMMEs) in the Cape Metropole", African Journal of

Business Management, vol. 6, no. 15, pp. 5383-5388.

7. Cant, M. 2012, "Challenges Faced By SME’s In South

Africa: Are Marketing Skills Needed?", International

Business & Economics Research Journal (IBER), vol.

11, no. 10, pp. 1107-1116.

8. Cheatham, L.R., Dunn, J.P., & Cheatham, C.B. 1989,

“Working capital financing and cash flow in the small

business”, Journal of Business and Entrepreneurship,

1(2): 1-12

9. Cui, Q., Hastak, M. & Halpin, D. 2010, "Systems

analysis of project cash flow management strategies",

Construction Management and Economics, vol. 28, no.

4, pp. 361-376.

10. de Jongh, H., Martin, W., Redenlinghuis, J., Kleinbooi,

C., Morris, D., Fortuin, A. & Bruwer, J. 2012,

"Utilisation of adequate internal controls in fast food

small medium and micro enterprises (SMMEs)

operating in Cape Metropole", African Journal of


11. Department of Trade and Industry. South Africa. 2008.

Annual Review of Small Businesses in South Africa

2005-2007 [online]. 3rd ed. Pretoria. Department of

Trade and Industry. Available from:

http://www.dti.gov.za/sme_development/docs/smme_re

port.pdf [Accessed 12 April 2014]

12. Drever, M., & Hartcher, J. 2003, “ Issues relating to

cash flow management for SMEs after the introduction

of the GST”, A paper presented at the Small Enterprise

Association of Australia and New Zealand 16th annual

Conference, Ballarat, 28 Sept-1 Oct, 2003. University

of Ballarat, Ballarat, Australia

13. Fatoki, O. 2012, "An Investigation into the Financial

Management Practices of New Micro-enterprises in

South Africa", Journal of Social Science, vol. 33, no. 2,

pp. 179-188.

14. Franco, M. & Haase, H. 2010, "Failure factors in small

and medium-sized enterprises: qualitative study from an

attributional perspective", International

Entrepreneurship and Management Journal, vol. 6, no.

4, pp. 503-521.

15. Friese, S. 2012. Qualitative data analysis with ATLAS.ti.

London: SAGE Publications

16. Hatten, T.S. 2012, Principles of small business

management, South-Western Cengage Learning.

17. Le Maux, J. & Morin, D. 2011, "Black and white and

red all over: Lehman Brothers’ inevitable bankruptcy

splashed across its financial statements", International

Journal of Business and Social Sciences.v2 i20, , pp. 39-

65.

18. Ligthelm, A. 2008, "The impact of shopping mall

development on small township retailers", South African

Journal of Economic and Management Sciences= Suid-

Afrikaanse Tydskrif vir Ekonomiese en

Bestuurswetenskappe, vol. 11, no. 1, pp. 37-53.

19. Ligthelm, A. 2006, "Size estimate of the informal sector

in South Africa", Southern African Business Review,

vol. 10, no. 2, pp. 32-52.

20. Luiz, J. 2002, "Small business development,

entrepreneurship and expanding the business sector in a

developing economy: The case of South Africa",

Journal of Applied Business Research, vol. 18, no. 2,

pp. 53-68.

21. Mackevičius, J. & Senkus, K. 2006, "The system of

formation and evaluation of the information of cash

flows", Journal of business economics and

management, vol. 7, no. 4, pp. 171-182.

22. Maxwell, J. A. 2013. Qualitative research design: an

interactive approach. 3rd ed. Thousand Oaks, California:

SAGE Publications.

23. Mbonyane, B. & Ladzani, W. 2011, "Factors that hinder

the growth of small businesses in South African

townships", European Business Review, vol. 23, no. 6,

pp. 550-560.

24. Morin, D. & Maux, J, L. 2011, “Black and white and

red all over: Lehman Brothers’ inevitable bankruptcy

splashed across its financial statements”, International

Journal of Business and Social Science, vol. 2 no.20,

pp. 39-65.

25. Neneh, N.B. 2012, "An exploratory study on

entrepreneurial mindset in the small and medium

enterprise (SME) sector: A South African perspective

on fostering small and medium enterprise (SME)

success", African Journal of Business Management, vol.

6, no. 9, pp. 3364-3372.

26. Ngwenya, F. 2012. The small and medium-sized

enterprises as a vehicle for employment creation in

South Africa: proceedings of the Clute Institute

International Conference, Bangkok, Thailand, March

2012 [online]. Available from:

http://conferences.cluteonline.com/index.php/IAC/2012

BK/paper/viewFile/1060/1070 [Accessed 13 April

2014]

27. Okpara, J.O. 2011, "Factors constraining the growth and

survival of SMEs in Nigeria: Implications for poverty

alleviation", Management Research Review, vol. 34, no.

2, pp. 156-171.

28. Rea, L. M., and Parker, R. A., 2005. Designing and

conducting survey research: a comprehensive guide. 3rd

ed. San Francisco: Jossey-Bass.

29. Remler, D. K., and Van Ryzin, G. G. 2011. Research

methods in practice: strategies for description and

causation. California: SAGE Publications

30. Rodriguez, M.A. 2011, "Cash is king—How OBM

helped a North American telecommunications

organization obtain $76 million in receivables", Journal

of Organizational Behavior Management, vol. 31, no. 3,

pp. 163-178.

31. Soenen, L.A. 1973, "The Concept of Cash Flow:

Techniques for Speeding up the Flow of Cash",

Management Decision, vol. 11, no. 5, pp. 314-322.

32. Taylor-Powell, E., & Renner, M. 2003. Analyzing

Qualitative Data [online]. University of Wisconsin-

Extension. Available from:

http://learningstore.uwex.edu/assets/pdfs/g3658-12.pdf

[Accessed 22 September 2013]

33. Thwala, W.D. & Phaladi, M.J. 2009, "An exploratory

study of problems facing small contractors in the North

West province of South Africa", African Journal of


34. van Scheers, L. 2010, "Challenges of small family

groceries shops in South Africa", World Journal of

http://www.dti.gov.za/sme_development/docs/smme_report.pdf

http://www.dti.gov.za/sme_development/docs/smme_report.pdf

http://conferences.cluteonline.com/index.php/IAC/2012BK/paper/viewFile/1060/1070

http://conferences.cluteonline.com/index.php/IAC/2012BK/paper/viewFile/1060/1070

http://learningstore.uwex.edu/assets/pdfs/g3658-12.pdf


100

Entrepreneurship, Management and Sustainable

Development, vol. 6, no. 3, pp. 221-231.

35. Zhang, Y., & Wildemuth, B, M. ‘Qualitative Analysis

of Content’. [online] In: Wildemuth, B.M. (Ed.),

Applications of Social Research Methods to Questions

in Information and Library Science. Available from:

http://www.ischool.utexas.edu/~yanz/Content_analysis.

pdf [Accessed 25 September 2012]

36. Zimmerer, T.W., Scarborough, N.M., & Wilson, D.

2008. Essentials of entrepreneurship and small business

management. 5th ed. Upper Saddle River, New Jersey:

Pearson/Prentice Hall.

http://www.ischool.utexas.edu/~yanz/Content_analysis.pdf

http://www.ischool.utexas.edu/~yanz/Content_analysis.pdf

cash flow management practices: an empirical …

Documents